- Jack Bogle seemed to think they're ok, e.g. recommending Vanguard's intermediate bond fund. Although he doesn't say why.
- Bill Bernstein is against them: they go down during a recession, like stocks; there's an agency conflict where shareholders encourage companies to take risks, which is bad for bonds; they can be illiquid during a crisis.
- Swedroe is against the broad range of investment-grade bonds, which are the only ones you can find in common low ER index funds, instead blessing only the highest quality ones. Says in the long run, they return about the same as Treasuries but are riskier, so you're not being compensated for the risk.
- Swensen doesn't like them.
- Rick Ferri likes them.
Corporate bonds are riskier than Treasuries because they carry default risk. They may also have a small negative convexity, but I think it's small enough to ignore.
The reason to hold them, in addition to Treasuries, would be diversification. But in what way do they diversify? For example, in what scenario do they move opposite to stocks or Treasuries?
- In a recession, they go down, same as stocks.
- When rates rise, they go down, just like all fixed rate bonds including Treasuries.
They seem to go up during good times, perhaps going up slightly more than Treasuries. But yield isn't the job of fixed income, that's for stocks. To be concrete, if I sold my corporates, then bought a little more stocks and bunch more Treasuries, wouldn't I have better yield with lower volatility, and less correlation with stocks?
Also, the weighting of bonds in an index isn't necessarily principled. Stock indices are typically weighted by market cap, which makes sense. Bond indices are weighted in proportion to how many bonds are out there, which means the most leveraged firms are weighted highest. It's not clear that's a good thing.
Data
nisiprius and others, is there a chart I should look at to help understand where corporates help with diversification, overall yield of my whole portfolio, or some other reason to hold them?